Friday, February 29, 2008

Pittsburgh fiscal vulnerability assessment

This is the second in an indeterminate series of municipal finance stress testing posts. Yes, exciting, I know! I'm looking at locally controlled revenue streams and how a stagnant or recessionary economy could impact the Pittsburgh budget. Again, everything here is back of the envelope, and should not be construed as a forecast of doom or a gold star for fiscal rectitude.

Pittsburgh has its budget on the web, and it is very thorough although it has far fewer convienent graphs and summary tables that collapses information in a blogger friendly fashion. I'll survive. Pittsburgh has more short term downside exposure to its projected revenues than Allegheny County because a higher proportion of its locally controlled tax base is on shiftable consumption patterns. I'll be using the recently published 2008 budget for this analysis.

Locally controlled levies make up 62% of the revenue. Property taxes make up about 46% of that 62% of locally controlled levies. The rest of the locally controlled revenue comes from a variety of real estate transaction, income, employment, business and parking taxes.

Property values are downwardly sticky due to psychology and the negative equity disencouragement for people who don't need to sell to keep their homes off the market. Furthermore, as I alluded to in the Allegheny County post, the county and thus the city assessment system is a fiasco that has no viable political incentive structure to fix. The county is the city's assessor, and since the county has decided to use 2002 as their base year, the city is using 2002 as their base year. Property taxes should be stable and near projection. There is a decent probability of increased deliquencies and non-recoverable amounts as foreclosed homes are increasing in the city, and the original mortgage payers have no incentive to continue paying their property taxes. But the estimates in this scenario should not be under significant stress.

Property taxes are the backbone of the city's locally controlled revenue and it is relatively strong. However the rest of the fiscal framework seems to be pro-cyclical in that revenue should be significantly higher in decent to good times, and lower in a recessionary/stagnant environment.

For instance, the deed transfer tax is 5% of locally controlled revenue. The city receives 2% of the value of a deed when a property is transferred. In a normal or above normal real estate market, there are significant number of transactions occurring from which the city derives revenue.In a housing bust like we are in now, transaction volume decreases. And here is the problem for the city as the budget assumes transaction volumes will be similiar to a five year trending average when it is fairly evident that there is a discontinuity in trend.

Payroll preperation, income taxes, and the $52 per worker emergency service tax are all dependent on employment levels while the first two are also dependent on wage levels. The city is vulnerable here on three counts. The first is if we are in a recession or stagnation environment, employment is flat or decreases. Furthermore in a slow economic environment, wages don't increase. Both of these counts will lead to lower tax revenue. Further more as a macro trend, what real compensation gains are occuring are occuring in non-cash compensations such as health insurance premium payment. The city can not tax real compensation, only actual cash wages are taxable under the currently allowable tax structure.

Finally, the last big chunk of city controlled revenue is sales tax revenue, both general and specific. The city does not have a directly controlled sales tax; instead it receives funding from the Regional Asset District that controls the funds from the 1% Allegheny County sales tax. If consumer spending decreases, sales tax revenue decreases. The directly controlled sales tax revenue is the amusement tax. As you can assume from its name, it taxes truly discretionary spending. Movie tickets, Pirates tickets, for profit arts exhibitions are taxed. This is truly discretionary spending which is the first spending that will be cut when people become cash and credit constrained. I don't need to go to the Pirates game, but I do need to buy gas to go to work will be the format of the individual level decision matrix.

Pittsburgh is at risk on seeing downside surprises for the tax revenue that the city directly controls if we are in a regional or national recession or significant stagnation. The majority of the city tax revenue streams are based on pro-cyclical factors. Property taxes are the most likely group of taxes to meet their revenue projections.